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3G/HSPA

Hutch Gets the Hump With KPN

It's never nice to see friends fall out. Hutchison Whampoa Ltd. has got the serious hump with KPN Telecom following the Dutch telco's decision to write down and flog its share in Hutchison 3G UK Ltd..

The €1.2 million writedown on its U.K. asset was part of KPN's latest financial clearout (see KPN Bites the 3G Bullet). Although KPN wrote down the asset to zero on its books, it's not saying its 15 percent stake in the U.K. 3G player is worthless. Rather, and we quote, "Hutchison 3G is no longer valued at net asset value, but at net realisable value." It's worth whatever it can be flogged for, basically.

In July 2000, KPN paid £900 million (worth $1.35 billion and €1.5 billion at the time) for its stake. Now KPN is hoping it can get €300 million for its holding.

Given the state of today's market, some people might think the KPN executives have been spending too much time in Amsterdam's coffee shops if they think they'll get that much. There are unlikely to be many (if any) offers, especially as any company taking on KPN's stake would be required to contribute to capital expenditure rounds. KPN is desperate to avoid stumping up the €150 million that Hutchison 3G UK currently has the right to demand from its Dutch shareholder.

This pretty much leaves KPN at the mercy of its partners, Hutchison Whampoa (65 percent) and NTT DoCoMo Inc. (NYSE: DCM) (20 percent).

Understandably, Whampoa's managing director Canning Fok and his fellow executives are not well pleased with the latest developments, especially as it is only months until the U.K. operation launches its commercial service -- allegedly. A statement released late yesterday said Hutchison Whampoa is "deeply disappointed" at KPN's decision: "We can only conclude that the decision reflects a reversal in strategy by their new management team." Ouch! The statement goes on to say how the U.K. greenfield operator differs from other European 3G businesses that have recently experienced writedowns (see Hutchison Responds to KPN).

Just to firm up its positive position, Whampoa, which announces its latest interim figures Thursday, says it will not be writing down the book value of its stake in the British 3G player.

The only comment coming from the U.K. operation is that KPN's decision does not affect rollout or launch plans in any way.

So what's the likely outcome of KPN's decision? And what is its stake actually worth? The favorite view is that Hutchison Whampoa will snap up the stake for a nominal fee, as it will not want its U.K. baby to suffer from negative market sentiment, especially so close to launch. However, some financial analysts contacted by Unstrung believe the stake to be worthless, given the very negative outlook for startup 3G players in particular.

Alternatively, Stephen Pentland, a partner at Spectrum Strategy Consultants, says the only relevant valuation is the amount of money someone would be prepared to pay. "The number of potential buyers is obviously very limited, as this is a pure-play greenfield 3G business, so there's a risk premium," says Pentland. "The obvious first port of call would be Hutchison [Whampoa] and DoCoMo. They would know what they would be buying into, whereas an external buyer would be very much in the dark, because Hutchison keeps everything so close to its chest. I doubt whether DoCoMo would have either the appetite or the cash." Which kinda leaves Hutchison as the one and only likely name in the frame.

Pentland adds that KPN's decision differs from that taken recently by partners Telefónica Móviles SA and Sonera Corp. (Nasdaq: SNRA) to write down and mothball their international 3G assets (see German 3G Player Folds). They made their decisions based on particular market conditions and events surrounding equipment delivery and regulatory timelines, says Pentland. KPN's decision over its U.K. asset is different, he argues, because it made its own mind up that this was the best course of action financially. "KPN chose to do this. There are no events that have forced it to do this."

All of which begs the question -- what is any 3G business worth? Obviously, without the usual metrics that can be used to evaluate existing mobile operations, such as cash generation, customer base and so on, it's largely a guessing game. Two years ago, when licenses were being bid for, hopes were high that investments would be returned with interest. Now, those companies that made the plunge are beset with doubts, and their investors are even more nervous about the prospects for 3G.

It seems the asset with the greatest value in European 3G right now would be a bona fide crystal ball. Now, that would attract a roomful of bidders!

— Ray Le Maistre, European Editor, Unstrung
http://www.unstrung.com
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